Why remortgaging might not make sense
There are some cases where remortgaging might be tricky or just not worth your while.
Last updated on
Dec 9, 2021 4:45
Most homeowners will be able to get a hassle-free remortgage, but sometimes it isn't the right choice. Your original mortgage offer letter should point out some things to look out for. These might include:
If you leave your mortgage deal early, you may be charged an early repayment fee, which might mean that, financially, remortgaging doesn’t make sense.
Let’s say you have a remaining mortgage loan of £50,000 and the early repayment charge in your contract is 5%. You’d be charged an exit fee of £2,500. As a result, sticking with your current mortgage – at least until the early repayment charge clause expires – can sometimes outweigh the benefits of remortgaging.
If your remaining mortgage debt is relatively small, say less than £50,000, then the fees involved with switching lenders sometimes make a remortgage financially impractical. Usually that’s not the case though.
As a basic rule of thumb, the smaller your mortgage is, the more impact any remortgage fees will have. And once your mortgage gets down to around £25,000, some lenders simply won’t consider you for a remortgage at all.
Debt consolidation sounds sensible: a good way to pay off money owed, by combining different bits of debt into your mortgage. The idea is to move high-interest debts, like credit cards, which cost you a lot of money each month, into a low-interest, long-term remortgage. But it’s not always sensible.
That’s because even though interest rates on mortgages are normally lower than rates on personal loans – and much lower than credit cards – you might end up paying far more overall if the loan is over a longer term.
For example, let’s say you have debts of £10,000 and you remortgage with 4% interest over 20 years. In the first year you’d pay £393.93 in interest, then over the 20 years your total interest will be £4,543.53.
Now take that same £10,000 loan and pay it off at a higher interest rate, 15%, over 3 years. That first year you’ll pay £1,309.29 in interest. But over the 3 years, you pay less interest in total: £2,479.52.
Essentially, as long as you can afford the larger monthly payments, a credit card or personal loan can be a more effective way to handle your debt than a so-called ‘debt consolidation’ remortgage deal. Remember to consider the loan length and how much overall you’ll be paying.
The other major issue with paying off debt with a remortgage is that you’re switching unsecured debt to secured debt – secured against your property. This means you could be putting your home at risk if you can’t afford to make the monthly mortgage repayments.
If you need a hand dealing with debt, there’s more information on the Money Advice Service.
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